Congratulations! You outlived your term life insurance and are fortunate enough to be alive. Typically, if you bought the correct face amount and term length for your circumstances at the time, then celebrate, you don’t need it anymore.
Drop the policy and get busy living. You paid a small price to protect the last 20 or 30 years of your life. However, the original question remains. What happens if you still need coverage? What options do you have then?
This post will reveal the five ways to deal with expired term life insurance.
Your Term Life Insurance Policy Doesn’t Mature
Technically, your term life insurance doesn’t mature. With most term life policies, you are covered until the age of 95. What is really ceasing is your “initial level term period”.
When you buy term life insurance, whether it’s a 10-, 20-, or 30-year duration, you gain the peace of mind that your premiums and death benefit will remain the same throughout the chosen period.
The longer the term, the more expensive the premiums are. A 30-year term costs more than a 10-year term, but you get the assurance that your premiums will not increase for the next 30 years.
What Happens When the Term Expires?
Let’s examine some of the options you may face at the end of your initial term period. The five scenarios below will depend on the type of term policy, your age at the end of the term, and the company you purchased the policy from.
1. Annual Renewable Term (ART)
This is plausibly the worst choice to exercise at the end of your initial term policy because of the costs that grow exponentially every year. If you choose to keep it, you will not have to go through underwriting or prove insurability.
Your coverage is guaranteed (which is probably the only good news). However, your premiums will be determined based on your attained age (age at the end of the term) and will continuously increase as you get older.
Let’s take a look at this example below: A 30-year-old male purchased a $500,000 20-year term coverage for $231.48 per year. In this instance, he is guaranteed the annual premium to remain fixed until the age of 50.
After that period has ended, you can see from the illustration that the premium will drastically increase on an annual basis until the age of 95.
In a nutshell, he has another 45 years to keep the policy if he so desires but at astronomical yearly costs.
- At year 21 or age 51: $5,050.00 per year
- At year 22 or age 52: $5,490.00 per year
- At year 23 or age 53: $6,085.00 per year
- At year 24 or age 54: $6,735.00 per year
Takeaway: Typically, the only time an individual may choose this option is when they face terminal illness and are expected to die shortly after. Most will shy away from the annual renewable option since it doesn’t make any financial sense.
2. Did You Buy Return of Premium Life Insurance?
Return of premium life insurance (ROP) is a term insurance policy that returns the premiums paid by the insured at the end of the term period.
If you purchased a 20-year term and outlived the term period, be on the lookout for a lump-sum check from the insurer. If you paid $100 per month for 20 years, you would get $24,000 after your term ended.
Takeaway: Most people do not buy this type of coverage because it costs two to three times as much as traditional term life, and you don’t get any interest on your money. In fact, you give the insurance company free money to invest it for their own benefit. You are probably better off buying term and investing the difference or putting it aside.
3. Converting Your Coverage
Most term life insurance comes with a conversion clause, which allows the insured to convert all or part of the coverage amount to a permanent policy.
This option doesn’t require you to undergo an exam or prove insurability, and you will be entitled to get the same health classification as when you first signed up for the policy, even if your health has deteriorated over the years.
There are a few pitfalls for this choice:
- You are at the mercy of the insurer’s products at the time of conversion. This means you may want whole life but will only be offered universal life or another product. Your choices are limited, and you have no control over the products they will provide in the future.
- Not all companies will let you convert at the end of your term. It’s probably the biggest misconception about the term life insurance convertibility option. The convertibility option comes with two exclusions: The first one is that you must convert it before the age of 70 (with most companies). The second one is that some companies allow conversion during the first few years of the policy, not at the end of your term, so you may anticipate the end of your term only to find out that you just missed the conversion option either by being over the age of 70 or by forgetting that you only had a few years at the beginning of the coverage years. For instance, if you buy a 10-year term policy from Protective Life, they will only allow conversion in the first eight years, not at the end of your term.
Takeaway: Regardless of when your term expires, make sure you convert it before the age of 70 or during the period the insurer allows. Many who buy life insurance in their early years are not aware or forget about it, which causes frustration at the end of the term policy.
4. Drop Your Coverage
Ideally, if you bought the right amount at the time you needed it and haven’t accumulated more debts, you probably don’t need the current policy.
It served you well when you and your family were younger, had a mortgage and many financial obligations that needed protection for the unexpected. Now, the children are grown up and aren’t dependent on your income, and the mortgage is paid off.
During the last 30 years, you also earned enough cash to build your nest egg and are considered self-insured. In other words, you have no need in a life policy, so dropping it makes practical sense.
5. Apply for a New Coverage
Before you do so, there two critically important questions you must ask yourself:
- How is your health?
- How much do you need?
Let me explain the logic behind these two questions:
- Remember that you are 20 or 30 years older, now, and may have developed pre-existing conditions which could disqualify you from getting coverage at all. If your health is poor and you still need coverage, convert your expired term to permanent coverage or consider guaranteed issue life insurance.
- Figure out the reason you need coverage. The reason you require it will also help you in determining the relevant policy for your circumstances. For instance, if you just remarried and need more than $100,000 in death benefit, you will need a term or guaranteed universal life policy. If, however, you only need small burial insurance, just opt for a final expense type of coverage that comes with fixed premiums through your lifetime.
An unexpected breadwinner’s death during childbearing years can mean total financial devastation to your heirs. You paid a small price to obtain protection for a specific period in your life when you and your family needed it the most.
You outlived your term insurance, and both your family and the insurer are delighted that you did.
Your first question now should be: Do I need new coverage? Your age at the end of the expired term along with current health and financial needs will dictate the amount and type of coverage you should pursue.
For most, dropping the expired coverage and applying for a new term is the route to take. Others may need to convert their policy to a permanent one at a full or reduced face amount.